Monday, November 12, 2007

Six Positive Trading Behaviors

There is much more to good trading than merely eliminating bad habits. Here are six trading behaviors I find among many of the best traders I've had the pleasure to work with:

1) Fresh Ideas - I've yet to see a very successful trader utilize the common chart patterns and indicator functions on software (oscillators, trendline tools, etc.) as primary sources for trade ideas. Rather, they look at markets in fresh ways, interpreting shifts in supply and demand from the order book or from transacted volume; finding unique relationships among sectors and markets; uncovering historical trading patterns; etc. Looking at markets in creative ways helps provide them with a competitive edge.

2) Solid Execution - If they're buying, they're generally waiting for a pullback and taking advantage of weakness; if they're selling, they patiently wait for a bounce to get a good price. On average, they don't chase markets up or down, and they pick their price levels for entries and exits. They won't lift a market offer if they feel there's a reasonable opportunity to get filled on a bid.

3) Thoughtful Position Sizing - The successful traders aren't trying to hit home runs, and they don't double up after a losing period to try to make their money back. They trade smaller when they're not seeing things well, and they become more aggressive when they see odds in their favor. They take reasonable levels of risk in each position to guard against scenarios in which one large loss can wipe out days worth of profits.

4) Maximizing Profits - The good traders don't just come up with promising trade ideas; they have the conviction and fortitude to stick with those ideas. Many times, it's leaving good trades early--not accumulating bad trades--that leads to mediocre trading results. Because successful traders understand their market edge and have demonstrated it through real trading, they have the confidence to let trades ride to their objectives.

5) Controlling Risk - The really fine traders are quick to acknowledge when they're wrong, so that they can rapidly exit marginal trades and keep their powder dry for future opportunities. They have set amounts of money that they're willing to risk and lose per day, week, or month and they stick with those limits. This slows them down during periods of poor performance so that they don't accumulate losses unnecessarily and have time to review markets and figure things out afresh.

6) Self-Improvement - I'm continually impressed at how good traders sustain efforts to work on themselves--even when they're making money. They realize that they can always get better, and they readily set goals for themselves to guide their development. In a very real sense, each trading day becomes an opportunity for honing skills and developing oneself.

These six criteria, I believe, can form the basis for effective report cards. Traders can grade themselves in these six areas and, over time, establish where they're strongest and weakest. I find such self-appraisals very helpful for coaching; ultimately they provide goals for self-development and criteria for measuring progress over time. In no small measure, good trading boils down to three factors:

1) Having a demonstrated edge;2) Having the skills needed to exploit that edge; and 3) Having the resilience to bounce back when the edge is no longer present.

It's the traders who have all three qualities that are most likely to make a long-term career out of the markets.

I rarely ever disagree with you but I think you first point might be based on what you experience every day in your environment. I've seen a few people trade those patterns very successfully. However, I will admit that they do not use it in the text book manner. Which leads me to disagree with you partially. I guess if you use these indicators the way every text book describes them, then you will just follow the herd. However, if you use them in a more creative manner, they can be pretty darn powerful. Just my two cents.

The topic of using the order book as a trading tool is a fascinating one, but I tend to steer clear of it for two reasons: 1) it's not really my area of expertise; and 2) I am sensitive to the perception that I may be sharing proprietary trading information.

About Me

Author of The Psychology of Trading (Wiley, 2003), Enhancing Trader Performance (Wiley, 2006), and The Daily Trading Coach (Wiley, 2009) with an interest in using historical patterns in markets to find a trading edge. I am also interested in performance enhancement among traders, drawing upon research from expert performers in various fields. I took a leave from blogging starting May, 2010 due to my role at a global macro hedge fund. Blogging resumed in February, 2014, along with regular posting to Twitter and StockTwits (@steenbab).